Socialist Reconstruction Chapter 4: Debt and Finance

How did the big banks’ commodification and manipulation of debt lead to the economic crisis of 2008?

• Banks issued mortgages, NOT MAINLY to help people buy houses, but so that the mortgages could be resold and bundled into financial instruments called “mortgage-backed securities”

  • These securities were grouped together, carved into financial instruments and sold to investors to bet on

  • The purpose of the original mortgages was to use some other people’s debts to enrich other people, NOT to make housing more affordable

BASICS: what is credit?

A contractual agreement in which a borrower receives something of value immediately and agrees to pay for it later

BASICS: what is interest?

Extra money someone is charged for borrowing money

BASICS: what are mortgages?

Loans that help people buy houses

How does debt function within capitalism?

• Debt keeps us poor: this is necessary for capitalism. Capitalism needs a low-wage labor force willing to work long hours, and debt produces this labor force.

• Debt makes others rich: this is because financial institutions treat debt as a commodity; thus, wealthy people buy and sell debt to make themselves rich

How do provisions in the US tax code enable the wealthy to use debt to avoid paying taxes and spending their investment income?

They enable the wealthy to:

• Hold onto their investment income

• Borrow money at low-interest rates to fund their consumption

• Write off the debt as a loss (accept they won’t be repaid and record it as an expense)

• Set up trusts to help their kids avoid inheritance tax

What are the results of imperialist debt policies hitting African countries hard?

• Cutting services > taking care of citizens: imperialist debt policies have made many African countries cut public services and repay banks huge amounts before they take care of their citizens

• This is why on average, African countries spend more paying interest on their own debts than they do on their own doctors and clinics.

Where do most profits in the financial sectors come from?

Colluding with government to create, trade and manipulate forms of debt

What does ending financial capital involve?

1. Abolition: abolishing most current debts and the institutions that create, sell and profit from debt

2. Reconstruction: rebuilding the credit system to fund/support social priorities from local to international levels

Finance capital (hedge funds, venture capital, private equity, etc.) will be replaced with what?

A common credit union and planning to allocate resources in accordance with needs and values

How does finance maintain the wealth of the capitalist class?

It uses debt to control people’s future income

• Ordinary people often need loans for basic needs.

• This traps them in debt they can barely repay because of high interest rates

  • Interest: extra money you pay when you borrow money

• Unlike the wealthy, most people are left vulnerable to the market’s harshness

What is finance capital generally about?

• Planning

• Deciding which activities and enterprises should be supported

• How risks should be managed

• Made in and by institutions according to institutional priorities

  • These priorities involve capitalist investors and wealth managers, NOT working people

Explain how the American system of long-term housing loans emerged.

• Terminating Building Societies (TBS) in the 19th century

  • TBSs financed the building of private homes.

  • These societies consisted of small groups of people pooling their savings to pay for building each other’s houses

    • This was a “communal solution” to housing provision

• The Great Depression as a turning point

  • The boom-and-bust cycle of the economy which made mortgages risky investments, as well as the Great Depression, marked a turning point.

  • The US government supported the banks and financial institutions by creating mortgage insurance companies

    • These companies were designed to protect lenders and creditors, and establishing long-term mortgages and other incentives that would stimulate the market in mortgages

  • What they should’ve done: back communal housing associations oriented towards meeting real housing needs

How will the socialist system proposed in the book deal with credit card debt and auto loans?

• High-quality public transportation: will end people’s dependence on private cars

• Better wages: will lessen people’s dependence on credit cards

• Abolishing fees and interest rates card companies charge to users: will transform credit cards into how they were initially imagined.

  • Credit cards will be ways people spend their portion of the collectively produced social surplus, rather than ways for the capitalist class to make claims on workers’ future earnings

Explain the relation between medical expenses, credit cards, and debt in the United States.

• Many Americans use credit cards to pay their medical bills because they have no other way to pay them.

  • High costs + extra interest on credit card money = extra fees: so in addition to trying to pay super-high medical care costs, they'll have to pay interest on the amount of money they owe on their credit card, which makes them get stuck with extra fees they can't pay

• Un-repaid medical debt: medical debt for some people will never be able to be repaid, because of the high interest rates charged by credit card companies.

  • This can lead them to be unable to pay their rent and go bankrupt.

What will the socialist government do to markets in stocks and bonds?

• It will dissolve the markets in stocks and bonds, and thus demolish the paper wealth held by shareholders in tens of millions of dollars

  • Paper wealth: wealth represented by the potential selling price of assets rather than actual, physical assets or liquid cash

• Fixed capital (of buildings, plants and machinery), people, knowledge and land: these are the real sources of wealth and these will remain.

  • These structures will become the basis for the next economy, and will be arranged for people and planet to flourish rather than through a financial system oriented toward capital accumulation

Without financial markets, what will guarantee a dignified retirement and economic security?

• Guaranteeing of basic rights: the new society will guarantee everyone the necessities of life as basic rights such that no one will need to worry about foreclosure, eviction, starvation, or enormous medical expenses

• Updating of Social Security: the government will also transform the Social Security program into a flourishing and functioning retirement system instead of refusing to make tax adjustments on Social Security like the capitalist class has been doing

Why are most people’s retirement savings not safe under capitalism?

• Tied to the market → insecurity: because companies can go bankrupt or cut pensions, which leaves workers with barely anything.

  • Since retirement funds are tied to the stock market, they can disappear in crashes or risky investments.

What does the Bureau of Wages, Prices and Rents do?

• Establishing range by getting information: it will synthesize information from across the country to establish the range for fair wages, prices and rents.

  • It will use that range as a way to set priorities and coordinate production and redistribution

• Generating plans through the bureau: through this bureau, the working class will generate/administer the plans that help us collectively account for what we have, what we need, and what we create together

How will the right to clean, safe, and attractive housing be guaranteed?

• Abolishing landlords

  • No one will ever live in fear of being kicked out on the street because they can’t afford to pay for housing

• Abolishing the housing market and mortgages

  • Your house is your house, not the bank’s

  • When you don't need the house anymore, the house or apartment will return to the community who will find its next set of residents

How will the BPWR deal with people who have different needs and desires?

• Paying a small extra cost: Everyone would be guaranteed a basic home, but if someone wanted a bigger or more desirable place, they would pay a small extra cost called rent (which is NOT charged to make money for a landlord)

• Rent for improvement, not for landlords: This rent would instead be a mechanism for distributing housing and generating funds for maintenance, building, and improvements

• More residents in a community → lower rent: communities seeking more residents will likely make larger houses or houses with more amenities available below the rent typical for those houses in other places.

How do the BWPR and National Housing Association coordinate rent?

• BWPR: coordinates rent in relation to wages and prices

• NHA: focuses on coordinating rent with respect to available housing inventories and needs

  • Both institutions will work with popular councils to ensure people have safe and reliable housing enabling them to flourish

How will work be socialized under this proposed system? What is the main advantage of this approach?

• Freeing up 6-7 million: 6 or 7 million people in financial services, health insurance, and advertising will be freed up and engaged in more meaningful / productive work (rebuilding material infrastructure, engaging in energy-efficient and sustainable manufacturing, regenerating forests, providing essential public services) AND we will all gain more free time

• The allocation of work: Socialist society will allocate work according to three often-overlapping criteria —

  • Professional expertise (neurosurgery, climate science, AI, astrophysics)

  • Socially necessary tasks (teaching, construction, electricity, therapy, graphic design)

  • Shared responsibilities (cooking, cleaning, laundry, tending to children)

• Social needs and flourishing > labor market distribution: by approaching labor distribution in terms of social needs and recognizing these three kinds of work, we will be able to do away with capitalism's preoccupation with the distribution of careers in a labor market and rather focus on the tasks and services our society needs to flourish

What are the mechanisms behind the proposed socialization of work?

• Large database for what we need: basically, the BWPR will compile a huge database of the kinds of expertise we need for achieving goals.

  • They do this by coordinating with education/training institutions to set and reach output targets (10K advanced accountants, 20K optometrists, etc.)

  • Interests, skills and need > money: So rather than making choices for the money, people will make choices based on their interests, skills, and general social need

• Developing systems for task distribution: local offices of the BWPR; along with communities, enterprises and unions; will develop systems for the distribution of necessary collectivized tasks (attending to young children, trash removal, maintaining green spaces, etc.)

  • People can choose whether to do a few hours each week or work for longer periods in exchange for bigger blocks of free time later.

• Sharing delivery apps: food deliveries and similar tasks would be shared through apps, with people signing up for a set number of tasks instead of making it their full-time job.

  • For harder or less desirable jobs, communities could offer extra incentives (higher pay, better housing, more free time, or chances to do more interesting work)

How will banks under the proposed socialist model work?

• Useful tasks rather than extortionate practices: banks under socialism will concentrate on the useful tasks of:

  • Maintaining accounts and facilitating payments

  • Organizing saving, lending and borrowing

  • Pooling people's savings

  • Directing state-provided funds to long-term projects

• Postal banks as a non-predatory approach to finance: in contrast to extortionate banking practices that prey on poor people, charging insane interest rates on payday loans and overwhelm people with multiple fees, postal banking services are typically low cost. Under socialism they will be free.

• Postal banks → people’s development banks:

  • The new system will expand postal banks into a network of people's development banks.

  • They will play a large role in the allocation of social wealth to specific projects, and help communities determine how to prioritize and what to support